Construction contracts are complicated structured legal documents that spell out the terms and conditions of an agreement between a construction contractor and an owner contracting for construction improvement services.
There are many types of construction contracts available such as prewritten agreements and agreements that are specifically created by attorneys for each project situation.
Although we could write pages on construction contracts, the intent of this article is to share the relationship between estimates, proposals and construction contracts.
Estimates, proposals and construction contracts are interconnected through a series of bid activities. They are independent documents that are interrelated with each other and sequentially support the construction bid award and legalize the authority of the general contracting process.
The relationship and definitions of these 3 documents is a topic that comes up quite often with homeowners who are trying to understand how their general contractor arrived at their bid and what tasks are included in the proposal and finally what are the terms and conditions of the construction contract.
The fact of the matter is that every Houston general contractor has their own style and method in preparing an estimate, proposal and construction contract, although there are some professional standards that do apply for the benefit of both owner and contractor.
We will review the essential elements and differences of a well-prepared estimates, proposal and construction contracts in the following article.
Learn the differences and commonalities of construction contracts, estimates and bid proposals
What is a Construction Estimate
Not to be confused with the concept of construction cost estimating, which is the function of quantifying materials and labor to calculate the projected cost of a building project.
In the context of the current topic, the technical definition of an estimate is a document or a verbal dollar amount or cost range of the projected construction cost of a project.
An estimate is considered by most professionals the be an intelligent guess based on someone’s experience of past project cost.
An estimate is a great tool for projecting the cost range of a project to build a concept budget or a target investment cost range for projects that are being prepared for architectural design.
Architects, designers and general contractors use them as a guide when preparing a unique building design as a method to avoid over designing the project.
What is a Construction Proposal
The legal definition of a construction proposal is a specified price for a detailed building project and services for a defined scope of work.
The proposal should contain some basic information like identifying the property, referencing any bid documents used and generally describing the larger scope of the project.
The vital aspect of a proposal is the details of the scope of work. The scope of work should detail each work task, while describing the quantity and finish of the completed work.
The scope of work should paint a picture of the progressive repair and improvements for your construction project.
What is the Difference Between a Proposal and an Estimate
The generally accepted definition of an estimate is a contractors qualified cost approximation that is offered to a client as a best guess budget amount.
These estimates are seldom legally binding, whereas a bid proposal becomes part of a construction contract agreement.
Project estimates are generally used to give the clients an idea of the ballpark cost associated with a proposed construction project, whereas the proposal details the cost, scope of work, payment terms and general conditions of the project.
A homeowner should add a larger dollar amount of contingency to a cost estimate to avoid unwelcome but expected financial surprises.
It is unfortunate that some building contractors will pass a low ball estimate off as a bid proposal. Only for the homeowner to realize well into a project that the actual cost is two to three times the estimated amount.
This is the very reason to understand the difference between a contractors estimate and bid proposal.
What Should Be Included in the Proposal
As mentioned before a proposal should principally define the project work scope in detail. It should outline the progression of the project tasks in a logical fashion as to draw a picture of the sequential order of each work item.
A proposal should identify the quality or/and the quantity of the products or materials used for pricing the bid amount.
For products or materials required for a building project, where the price is across a large spectrum, the proposal should provide a product allowance schedule or specify a specific brand name for each product to communicate the implied quality.
An allowance schedule should also contain a unit measure of a price for the client to understand when shopping for the product.
It is also important for proposals to identify any inclusions and exclusions. This is to avoid future misunderstandings and provide special relevant working conditions that might affect the price or increase change orders.
For example, if the project is time sensitive and the client has agreed to pay overtime for working longer items, this should be clearly spelled out.
If a client does not want workmen using their bathroom and wants the contractors to furnish a portable toilet, it should be clearly included in the proposal.
What Should Be Included in the Construction Contract
Generally speaking, proposals are not contracts, although some general contractors will include a signature line on a proposal and attempt to use it as a construction contract.
As described above a proposal is principally used to convey the details of the project work task and describe what is included and not included.
A contract is a document that is used to detail misunderstanding remedies and causes of action that result in a breach of the understanding.
Typically, they include payment terms, mediation clauses, contractor insurance requirements and conditions for liability & responsibilities.
Contracts will often reference the proposal as an addendum to the contract provided there is nothing in the proposal that is contradictive or in conflict with the contract.
Payment terms, lien release language and cures & remedies should be left to the language of the contract.
A contract’s primary purpose is to outline the details of a owners and general contractors understanding.
In most cases construction contracts are only used when there is a major disagreement between the two parties.
In cases where the construction contracts are not clear on an issue of conflict, the contract should have a clause that addresses mediation or arbitration as a first step in conflict resolution.
The construction contracts should detail the payment terms, procedures and description of change orders. Change orders do not always have to be associated with an expense.
They should address any substantive change made that deviate from the plans or general agreement. Change orders are an extension of the contract.
Comparing High Bids with Low Bids
Comparing high bids to low bids takes careful review of the bid proposal details and often requires further research by a Q&A session with the general contractor.
These questions should be focused on topics directed toward bid leveling. Bid leveling is a term used to describe the process of equalizing and measuring multiple bids in an effort to level the playing field.
The idea is for the owner to get a better understanding of what the owner is actually receiving for the specified price.
Many of these cost differences can be explained by understanding the details of the proposal for instance;
- What is the quality of the materials proposed,
- Does the contractor intend on using self performed labor or subcontractors,
- Does each contractor have sufficient insurance coverage (general liability & work comp)
- Are the unselected product allowances sufficient to cover the product quality,
- What are the applied mark ups for change orders
It is not uncommon for a proposal to be as much as 10% – 15% different. Generally, bid amounts outside this range suggest there is something substantially missing.
That is why it is a must to have a detailed description and quantification of the scope of work. Low and high bid proposals that are significantly outside the bid range should be disregarded if a justifiable explanation is not offered.
Value Proposal vs Cheapest Bid
The ultimate objective of evaluating bid proposals depends on the owner’s goal. Is the owner seeking the cheapest bid or are they looking for the best value.
These two goals are not the same thing. The cheapest bid price does not mean that you will receive the best value for your hard-earned cash.
What it means is that it is the lowest price. That may be a fine approach for comparing grocery items, but not for comparing detailed building services.
One of my favorite questions I like to ask clients when this topic comes up is, if you needed open heart surgery would you hire the lowest price surgeon?
The answer in most cases is NO… When I ask why not, they usually say I want the best doctor I can afford. This answer is quite understandable.
They see the value in receiving the best health care. This is not to say that remodeling your home is like heart surgery, but rather that if you do not see the value in a higher price why would you pay more than you need to.
The entire point of this article is that if you do not put the time and effort into evaluating your proposals carefully, you will not truly understand the value that your general contractor is providing you.
You will be best served if you select a Houston general contractor that provides clear and transparent construction contracts and that you are personally trust as having integrity.
